TIM3221

INTERNET MARKETING

LEC 04:
PRICE
Learning Outcomes
After the end of Lecture 4, you will be able to:

 Identify the main fixed and dynamic pricing

strategies used for selling online.
 Discuss the buyer’s view of pricing online in relation
to real costs and buyer control.
 Highlight the seller’s view of pricing online in relation
to internal and external factors.
 Outline the arguments for and against the Net as an
efficient market.
 Describe several types of online payment systems
and their benefits.

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The Internet Changes Pricing Strategies

■ Price is
the amount of money charged for a product or
service.
the sum of all the values (such as money, time,
energy, and psychic cost) that buyers
exchange for the benefits of having or using a
good or service (CV = B – Costs).
negotiated.

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The Internet Changes Pricing Strategies (con’t)

■ Fixed Pricing – one price (modern idea)

■ Dynamic Pricing – varying prices for different
customers (Internet)
■ Price Transparency – all can view varying
prices (Internet)
■ The meaning of price depends on the
viewpoint of the buyer and the seller.

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BUYER VIEW

value = benefits – costs

Real Costs - Online cost savings come from :
A. Convenience (24x7x365)
B. Fast (delivery, download)
C. Self-service (no human interaction)
D. One-stop shopping (Unlimited goods)
E. Integration (other sites)
F. Automation (auto record)

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BUYER VIEW

value = benefits – costs

Real Costs - Online cost savings come from :
A. Convenience (24x7x365)
– E-mail allows asynchronous communication among
buyers and sellers at any location and prevents
“telephone tag” (both parties need not be online
simultaneously to communicate).
– Shopping bots (automated chat and animated help
programs on Web sites) provide synchronous help as a
customer is shopping online.

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BUYER VIEW

value = benefits – costs

Real Costs - Online cost savings come from :
B. Fast (delivery, download)
– Although it might take more time to download a Web
page than the few remaining dial-up users would like,
anyone can visit a site such as iGo.com, order a laptop
battery, and receive it the following day—even while on a
foreign business trip.

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BUYER VIEW

value = benefits – costs

Real Costs - Online cost savings come from :
C. Self-service (no human interaction)
– Customers can track shipments, pay bills, trade
securities, check account balances, and handle many
other activities without waiting for sales reps. In addition,
technology allows users to request product information at
Web sites and receive it immediately. Of course, all these
activities take time to perform.

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BUYER VIEW

value = benefits – costs

Real Costs - Online cost savings come from :
D. One-stop shopping (Unlimited goods)
– AutoMall Online has partnered with a number of firms to
provide automobile price comparisons, research about
various models and manufacturers, financing and
insurance information, and service options.
– This firm also offers instant online pricing from a large
network of auto dealerships and gives customers a
purchase certificate guaranteeing that the price quote
will be honored at the dealership.
– AutoMall Online’s track record proves that customers
receive value: More than 50 percent of its users purchase
a car within 45 days of using the service, and 90 percent
do so within six months.

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BUYER VIEW

value = benefits – costs

Real Costs - Online cost savings come from :
E. Integration (other sites)
– Web portals such as Yahoo! and Google Mobile allow
users to quickly find many things they want online from
any device.
– Even Pinterest could now be considered a Web portal.
– Some sites allow users to create individualized Web
pages with news, stock quotes, weather, and other
customized information.
– For example, one consumer purchased a unique
backpack online only to find out, via e-mail, that the firm
was out of business.
– No problem—it forwarded the order to a partner e-
commerce company, which filled the order in a day.

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BUYER VIEW

value = benefits – costs

Real Costs - Online cost savings come from :
F. Automation (auto record)
– Customers value simplicity and ease; because the
internet makes some activities more complex, technology
can help.
– For example, Web browsers, sites, and companies that
allow customer computers to keep track of passwords for
Web sites (such as Robo-Form) and to track previous
purchases at Web sites save time and energy.

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The seller’s price may or may not include shipping, tax, and other seemingly
hidden elements - hidden in the sense that these costs often are not revealed
online until the last screen of a shopping experience.

Exhibit 10.2 displays the different prices for the book, The Hunger Games (book one in
the series), as displayed by several different online booksellers. These prices are
fairly clear yet complex to understand, and the burden is on the consumer to understand
his or her needs and translate those into the best price.
Note that tax is not included because it varies by state or country - another complexity.
The lowest price bookseller, Biblio, does not have the highest rating, so is it better to pay
an additional few dollars to use a more highly rated store with more reviewers and a
better-known brand name? Also note how there is quite a range in shipping prices from
most sellers. Finally, why is there an 80.5 percent price dispersion from the lowest to the
highest price? 13
BUYER VIEW (con’t)
Buyer Control – the power has shifted from
sellers to buyers, negotiated

A. Reverse auction (buyers set prices, sellers decide)

Product information:
B. Online Sellers
C. Online Buyers
D. Online Auction

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BUYER VIEW (con’t)
Buyer Control – the power has shifted from sellers to buyers,
negotiated
Reverse auction
– buyers set prices for products, and sellers decide whether
to accept these prices.
– A good example is Priceline.com, where you name the
price you want to pay for hotels, flights, cars, vacations,
and cruises.
– In the B2B market, buyers bid for excess inventory at
exchanges and for products at firms such as General
Electric and Caterpillar.
– In the B2G market, government buyers put out a request
for proposal for materials and labor needed for a
particular project, and businesses bid for the work.
– The government buyer selects the lowest price, in effect
having control over the exchange.

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BUYER VIEW (con’t)
Buyer Control – the power has shifted from sellers to buyers,
negotiated
Online Sellers
■ Online sellers are more willing to negotiate
■ than their offline counterparts in most industrialized
■ nations, thus giving power to buyers in the
■ exchange. Perhaps it is easier for U.S. consumers
■ to negotiate from behind an impersonal computer,
■ as compared with standing face to face with theseller. Also, sellers
realize that information technology
■ can help them better manage inventories
■ and automate frequent price changes.

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BUYER VIEW (con’t)
Buyer Control – the power has shifted from sellers to buyers,
negotiated
Online Buyers
– Buyer power online is also based on the huge quantity of
information and product availability on the Web. As a
result, online buyers are becoming more sophisticated—
as they must be, considering the example of the Hunger
Games book pricing options. This was put well by Erik
Brynjolfsson, co director of the E-business Center at MIT:
“We’re moving toward a very sophisticated economy. It’s
kind of an arms race between merchant technology and
consumer technology (in the form of shopbots).
– If consumers are not sophisticated they can be soaked. If
managed intelligently, the tools are there to create a
revolution.”

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BUYER VIEW (con’t)
Buyer Control – the power has shifted from sellers to buyers,
negotiated
Online Auction
– With power comes risk. Consider what happens to a
substantial number of bidders in online auctions. In what
has been called “the winner’s curse,” some people
actually pay a higher price for auctioned products than
they would pay an online retailer.

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SELLER VIEW
■ value = profit ($)
 Price the amount of money they receive from
buyers. All sellers want/need to make a profit.
 Internal Factors:
o Pricing Objectives
o Marketing Mix Strategy (product, price, distribution)
o Information Technology

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SELLER VIEW (con’t)
Pricing Objectives may be:
o Profit oriented
– Profit maximisation
o Market oriented
– Building a larger customer base may lead to lower costs and higher
long-run profit.
– Low prices generally build market share.
– For example, Survey Monkey, a Web-based survey software program,
offers its basic level software at a low price to build share (compared to
competition), and then upsells to annual maintenance fees and
programs with more functionality.
– Negotiation and bidding are also market-oriented approaches.
– For example, consumers can bid for hotel room nights on priceline.com,
hotwire.com, roomauction.com, and many individual hotel Web sites.
o Competition oriented
– The objective is to set price according to what competitors charge for
similar products, paying less attention to the company’s own costs or to
demand. The internet’s pricing transparency gives firms quicker access
to competitive price changes and increases the number and speed of
online price changes.

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SELLER VIEW (con’t)
IT:
o Cost Adding
 Shipping costs
 Commission costs (7% - 15% of sales)
 Site development and maintenance costs
 Customer acquisition costs ($82)
o Cost Saving
 Self service order processing
 Just-in-time inventory
 Digital product distribution costs
 Low overhead, printing, mailing, customer service
costs

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SELLER VIEW (con’t)
External Factors:
o Market Structure
 Pure Competition
• No product differentiation (corn, onion, potato,
MP3music downloads [customer service])
 Monopolistic Competition
• Prices differentiate product (online university courses
 Oligopolistic Competition
• Customer highly sensitive to prices (online travel agent,
Airlines)
 Pure Monopoly
 Price regulated by government

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SELLER VIEW (con’t)
 External Factors:
o Market Efficiency
 When one has equal access to product, price and
distribution information and expects:
• Lower prices
• High price elasticity
• Responsiveness of the quantity demanded of a
good or service to a change in its price.
• Frequent price changes
• Narrow price dispersion between highest and lowest
price for a product

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Market Efficiency vs Pricing Control

Government control

Pure monopoly

Oligopolistic competition
Area of control for e-marketing
Monopolistic competition -
pricing strategy

Pure competition

Efficient market

Market control

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PRICING STRATEGIES
 Fixed Pricing (Menu Pricing) - Everyone pays the
same price, commonly used by many brick-and-
mortar firms. Two common fixed price strategies
are:
 Price leadership (lowest price)
 Promotional pricing (expiration date product)

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PRICING STRATEGIES (con’t)
 Dynamic Pricing – offering a different price to
different customers. Airlines are a classic example
of dynamic pricing. Unlike fixed pricing, dynamic
pricing can be initiated by the seller of the buyer.
Two types:
 Segmented Pricing
 Negotiated Pricing

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Segmented Pricing

■ Pricing levels are set based on order size, timing,

demand, supply or other factors.
■ Pricing according to customer behavior segments is
becoming more common as firms collect more
behavioral information.
■ Segmented pricing can be effective when:
The market is segmentable.
Pricing reflects value perceptions of the segment.
Segments exhibit different demand behavior.

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Segmented Pricing (con’t)

■ Geographic segment pricing

Pricing differs by geographic area.
May vary by country.
May reflect higher costs of transportation,
tariffs, margins, etc.
■ Value segment pricing
Recognition that not all customers provide
equal value to the firm.
Pareto principle: 80% of a firm’s business
comes from the top 20% of customers.

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Customer Value Segments

Customer Value Segments from Low (One Star) to High (Five Star)
Source: clip art courtesy of openclipart.org

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Negotiated Pricing

■ Through negotiation, the price is set more than

once in a back-and-forth discussion.
■ Online auctions utilise negotiated pricing.
Consumers enjoy the sport and community.
B2B auctions are an effective way to unload
surplus inventory.
■ www.ebay.com

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Payment Options

■ Electronic money uses the Internet and

computers to exchange payments electronically.
■ Off-line e-money payment systems include:
Smart chips.
Payment by cell phone.
■ For one-time payments, PayPal has become the
industry standard with over 84 million accounts
worldwide.

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Bartering

■ Goods or services are exchanged for other

products rather than cash.
■ Users of bartering may enjoy tax benefits.
■ Bartering is not a profitable pricing strategy.
■ Exchanging or auctioning used items online can
hurt sales of new products.

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Placement on Web Pages

 Many physical world retailers have found that if they first offer
customers a higher-priced product overall sales will be higher than
if they first offer a lower-priced product.
 For example, if similar tables sell at prices from $400 to $4,000
(with several priced in the middle), it is best to offer the $4,000
version first.
 The customer will often look at lower-cost versions, but fewer
offered the $400 table will look at much higher-cost versions.
 Robert Cialdini discussed this “larger and then smaller request”
principle in his famous book, Influence. This principle may also
hold true online; thus, marketers might arrange online pricing
pages as shown in Exhibit 10.11B, not Exhibit 10.11A as a way to
increase the average sales price, and thus, overall sales (see
sixteenventures.com for more commentary on this still unproven
concept).

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Placement on Web Pages

Exhibit 10.11A (top), Exhibit 10.11B (bottom)

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